By now it’s clear that many investors, both institutional and retail, have been hesitant to put money into the stock market. Pessimism about the health of the global economy and uncertainty about its future still loom large in many investors’ minds.

Nevertheless, I remain relatively optimistic because markets often rally strongly during periods after disastrous events.

That being said, I expect stocks to pull back before the year is out, but absent any major blowups, investors should regard such an event as a buying opportunity. Any pullback in the US market should register somewhere between 5 and 10 percent, whereas emerging markets will likely sustain a bigger hit.

Generally speaking, I expect markets to move higher through the first few months of 2010, with November, December and January being the “money months.”

Looking at the macro picture, investors should anticipate the US recovery to slow, but accommodative monetary policies and improving demand should keep the global economy humming. Relatively low inflation, decent earnings growth and weaker USD will also be positive for global equities. Finally, avoiding another big drop (i.e., 10 to 15 percent) in US housing prices will also buoy investors’ sentiment. 

When central banks begin to tighten the money supply, markets will at risk for a big decline. But that’s not a near-term issue; the Federal Reserve, for example, isn’t expected to raise rates until next summer.

For Asian markets the main worry remains the strength of earnings. Earnings in Asia haven’t declined as much as they did in 2001 or even the 1980s recession; now that recovery is underway analysts are in a frenzy to upgrade earnings expectations. 

One of the main reasons why Asian companies command such respect these days is their clean balance sheets and low debt. The debt-to-equity ratio for Asian ex Japan companies as a whole is now around 26 to 27 percent, which, though not as low as the 24 percent registered in 2007, is low by global and regional standards. In other words, Asian companies enjoy extremely clean balance sheets, and will have the opportunity to lever up when they so decide.

And Asian companies will have to do something with all this cash. Expect to see an uptick in mergers and acquisition as well as increased dividends in some sectors. Until then, long-term investors will be better off building positions in companies that not only offer superior growth opportunities but have the cash to support expansion.

Although Asian companies have held their own during this downturn, the question remains whether earnings expectations are now too high for next year. For some sectors this will prove to be the case, while others will prove more resilient.

To avoid big disappointments, investors should pay attention to valuations and overweight those sectors that offer the best value. At current levels, energy, telecommunications, financial, industrial, and material companies appear to be the cheapest in Asia.